Driving the Global Economy with the Brakes On
IMF Blog, January 24, 2012
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- Authors: Olivier Blanchard
- Published: January 24, 2012
Global outlook and risks
- The world recovery, already weak, is in danger of stalling; the epicenter is Europe, with increasing effects on the rest of the world.
- There is a greater danger that the European crisis intensifies; in that case, the world could be plunged into another recession.
- If the downward spiral is not contained, potential outcomes include disorderly default or Euro exit, with major spillovers first to the rest of the Euro area, and then to the rest of the world.
- Even if corrective measures are adopted decisively, the “brakes” on the economy will remain engaged and unemployment will decrease only slowly.
Forecasts and key statistics
- Euro Area growth forecast for 2012: ‑0.5 percent (a decrease of 1.6 percentage points relative to the September 2011 projection).
- Italy 2012 growth forecast: ‑2.2 percent.
- Spain 2012 growth forecast: ‑1.7 percent.
- United States 2012 growth forecast: 1.8 percent (unchanged).
- Emerging and developing countries growth outlook: 5.4 percent (a decrease of 0.7 percent relative to the September forecast).
- Revisions are particularly sharp in Central and Eastern Europe; revisions are also substantial in China and India.
Forces behind the numbers
- Two major “brakes” operating in most advanced economies:
- Fiscal consolidation: necessary because debt levels are very high, but in the short run a drag on demand and growth.
- Tight credit: weak banks in many countries, particularly in Europe, are deleveraging; deleveraging often means tighter credit to households and firms, another drag on growth.
- In Europe specifically:
- Doubts about fiscal sustainability → high yields on sovereign bonds → doubts about bank solvency.
- To reassure markets, governments have consolidated further; to reassure investors, banks have deleveraged and tightened credit.
- These actions have further decreased growth, creating a dangerous downward spiral.
- Spillovers beyond Europe:
- Trade linkages are transmitting weakness to Euro trade partners.
- Risk aversion and uncertainty are increasing volatility of capital flows to emerging markets.
Policy recommendations
- Fiscal consolidation should proceed, but at an appropriate pace:
- Decreasing debt is a marathon, not a sprint; going too fast will kill growth and further derail the recovery.
- A credible medium term plan is essential; such a plan is still missing in the United States and Japan.
- Once a credible plan is in place, in most countries automatic stabilizers should be left to play; in some countries slower consolidation may be appropriate.
- Avoid a credit crunch:
- Where banks need higher capital ratios, they should raise capital rather than reduce credit.
- Recapitalization through public funds will help credit, sustain activity, and may improve the fiscal outlook.
- Ensure low borrowing costs for Euro periphery countries that are taking tough measures:
- Public liquidity provision may be needed because many investors have left the market and are unlikely to return soon.
- Liquidity can be provided by the European Central Bank, by the European Union, and by the IMF in various combinations.
- Available funds must be large enough to maintain low interest rates and fiscal sustainability.
Scenarios and assumptions
- IMF forecasts assume the recommended measures will be adopted and the Euro crisis will slowly decrease in intensity.
- If the measures are not adopted, the worst outcomes are a real possibility.
- If the measures are adopted decisively, the world economy may perform better than the IMF forecast, but the recovery will still be constrained.
Olivier Blanchard, January 24, 2012
Content in this bundle
- iMFdirect 博客: 踩着刹车驾驶全球经济, 2012年1月24日
- ブレーキがかかったまま進み続ける世界経済; オリビエ・ブランシャール; iMF direct ブログ 2012年1月24日掲載
- Управление мировой экономикой с включенными тормозами